The Navawho Corporation has patented a new type of handheld computer that will compete with Palm Pilots, Blackberries, and Sidekicks. The device is attached to a USB connection and enables voice e-mail to be sent through the computer. The company was started with venture capital and anticipates giving away 5,000 to influential writers and celebrities as a promotion. Their hopes for first year sales are 15,000 at a price of $60.00 dollars. The cost of making each unit is $11.00 dollars.
The biggest issue for Navawho is that they have no true idea of how many they will sell. Their estimates are based on market research at one college campus, where they presented their device and the alternatives to 100 college students and found that there appeared to be instant appreciation for the product and its price.
They think the capacity of their present warehouse location in East Los Angeles adequate to produce 5,000 a year and they are scouting for a second location in the event that their projections come true. Also, they estimate that they absolutely must sell a minimum of 7,000 at that price to sustain enough cash flow to continue into a second year, based on their calculations.
They believe that if they are a big hit, economies of scale will reduce the unit cost. Demand of 20,000 should reduce the average cost by $1.00, and demand of 30,000 should reduce the average cost by $2.00. Thus far, an investment of $4 million has been pumped into the project. Now, poised to release their product, they have been approached by a major manufacturer to sell out at $15 million.
What are the implications of selling out at this juncture? What difficulties do they face as a new entrant?